Owning a profitable property is a tough business - you need to ensure you have considered multiple factors so that you can maximize your returns. From the decision to invest in real estate, to actually purchasing your first rental property, there is a lot of work to be done. This task may be daunting for the first-time investor, so here are the top 10 things you should consider when shopping for an income property.
Starting Your Search
Having a real estate help you complete the purchase of a rental property is very beneficial as they can give you insight into the rental comps and sales comps for the area. The most important thing is to ensure the rental property will give you positive cash flow and that you take an unbiased approach to all the properties and neighborhoods within your investing range
Your
investing range will be limited by whether you intend to actively manage the
property (be a landlord) or hire someone else to manage it. If you intend to
actively manage, you should not get a property that's too far away from where
you live. If you are going to get a property management company to look after
it for you, your proximity to the property will be less of an issue.
Let's
take a look at the top 10 things you should consider when searching for the
right rental property.
1.
Neighborhood: The quality of the
neighborhood in which you buy will influence both the types of tenants you
attract and how often you face vacancies. For example, if you buy in a
neighborhood near a university, the chances are that your pool of potential
tenants will be mainly made up of students and that you will face vacancies on
a fairly regular basis (during summer, when students tend to return back home).
2.
Property Taxes: Property taxes are not
standard across the board and, as an investor planning to make money from rent,
you want to be aware of how much you will be losing to taxes. High property
taxes may not always be a bad thing if the neighborhood is an excellent place
for long-term tenants, but the two do not necessarily go hand in hand. The
town's assessment office will have all the tax information on file or you can
talk to homeowners within the community.
3.
Schools: Your tenants may have or
be planning to have children, so they will need a place near a decent school.
When you have found a good property near a school, you will want to check the
quality of the school as this can affect the value of your investment. If the
school has a poor reputation, prices will reflect your property's value poorly.
Although you will be mostly concerned about the monthly cash flow, the overall
value of your rental property comes in to play when you eventually sell it.
4.
Crime: No one wants to live next
door to a hot spot for criminal activity. Go to the police or the public
library for accurate crime statistics for various neighborhoods, rather than
asking the homeowner who is hoping to sell the house to you. Items to look for
are vandalism rates, serious crimes, petty crimes and recent activity (growth
or slow down). You might also want to ask about the frequency of police
presence in your neighborhood.
5.
Job Market: Locations with growing
employment opportunities tend to attract more people – meaning more tenants. To
find out how a particular area rates, go directly to the U.S. Bureau of Labor
Statistics or to your local library. If you notice an announcement for a new
major company moving to the area, you can rest assured that workers will flock
to the area. However, this may cause house prices to react (either negatively
or positively) depending on the corporation moving in. The fallback point here
is that if you would like the new corporation in your backyard, your renters
probably will too.
6.
Amenities: Check the potential
neighborhood for current or projected parks, malls, gyms, movie theaters,
public transport hubs and all the other perks that attract renters. Cities, and
sometimes even particular areas of a city, have loads of promotional literature
that will give you an idea of where the best blend of public amenities and
private property can be found.
7.
Building Permits and Future
Development:
The municipal planning department will have information on all the new
development that is coming or has been zoned into the area. If there are many
new condos, business parks or malls going up in your area, it is probably a
good growth area. However, watch out for new developments that could hurt the
price of surrounding properties by, for example, causing the loss of an
activity-friendly green space. The additional condos and/or new housing could
also provide competition for your renters, so be aware of that possibility.
8.
Number of Listings and
Vacancies:
If there is an unusually high number of listings for one particular
neighborhood, this can either signal a seasonal cycle or a neighborhood that
has "gone bad." Make sure you figure out which it is before you buy
in. You should also determine whether you can cover for any seasonal fluctuations
in vacancies. Similar to listings, the vacancy rates will give you an idea of
how successful you will be at attracting tenants. High vacancy rates force
landlords to lower rents in order to snap up tenants. Low vacancy rates allow
landlords to raise rental rates.
9.
Rents: Rental income will be the
bread and butter of your rental property, so you need to know what the average
rent in the area is. If charging the average rent is not going to be enough to
cover your mortgage payment, taxes and other expenses, then you have to keep
looking. Be sure to research the area well enough to gauge where the area will
be headed in the next five years. If you can afford the area now, but major
improvements are in store and property taxes are expected to increase, then
what could be affordable now may mean bankruptcy later.
10. Natural Disasters: Insurance is another expense that you will have to subtract from your
returns, so it is good to know just how much you will need to carry. If an area
is prone to earthquakes or flooding, paying for the extra insurance can eat
away at your rental income.
Getting Information
Talk
to renters as well as homeowners in the neighborhood. Renters will be far more
honest about the negative aspects of the area because they have no investment
in it. If you are set on a particular neighborhood, try to visit it at
different times on different days of the week to see your future neighbors in
action.
The Physical Property
In
general, the best investment property for beginners is a residential,
single-family dwelling or a condominium. Condos are low maintenance because the
condo association is there to help with many of the external repairs, leaving
you to worry about the interior. Because condos are not truly independent
living units, however, they tend to garner lower rents and appreciate more
slowly than single-family homes.
Single-family
homes tend to attract longer-term renters in the form of families and couples.
The reason families, or two adults in a relationship, are generally better
tenants than one person is because they are more likely to be financially
stable and pay the rent regularly. This owes to the simple fact that two can
live almost as cheaply as one (as far as food, rent and utilities go) while
still enjoying dual income. As a landlord, you want to find a property and a
neighborhood that is going to attract that type of demographic.
When
you have the neighborhood narrowed down, look for a property that has
appreciation potential and a good projected cash flow. Check out properties
that are more expensive than you can afford as well as those within your reach
– real estate can often sell below its listing price. Watch the listing prices
of other properties and ask buyers about the final selling price to get an idea
of what the market value really is in the neighborhood. For appreciation
potential, you are looking for a property that, with a few cosmetic changes and
some renovations, will attract tenants who are willing to pay out higher rents.
This will also serve you well by raising the value of the house if you choose
to sell it after a few years.
As
far as cash flow, you are going to have to make an informed guess. Take the
average rent for the neighborhood and subtract your expected monthly mortgage
payment, property taxes (divided by 12 months), insurance costs (also divided
by 12) and a generous allowance for maintenance and repairs. Don't lie to
yourself and underestimate the cost of maintenance and repairs or you will pay
for it once the deal is done. If all these figures come out even or, better
yet, with a little left over, you can now get your real estate agent to submit
an offer and, if everything goes well, order business cards with Landlord
emblazoned across the top.
Ready to Make the Move?
Make
sure you get the best mortgage rate if you are looking to invest in a rental
property.
The Bottom Line
Every
state has good cities, every city has good neighborhoods and every neighborhood
has good properties, but it takes a lot of footwork and research to line up all
three. When you do find your ideal rental property, keep your expectations
realistic and make sure that your own finances are in a healthy enough state
that you can wait for the property to start producing cash flow rather than
needing it desperately. Real estate investing doesn't start with buying a
rental property - it begins with creating the financial situation where you can
buy a rental property.
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